Budget 2020: Government Proposes Taxing Stateless Persons

Government aims to tax high net individuals who do not pay taxes by hopping between tax jurisdictions and avoid becoming resident.

A man looks out at residential buildings standing across the Jialing River in Chongqing, China. (Photographer: Qilai Shen/Bloomberg)
A man looks out at residential buildings standing across the Jialing River in Chongqing, China. (Photographer: Qilai Shen/Bloomberg)

Finance Minister Nirmala Sitharaman has proposed changes in the taxability of persons who avoid residence in any country to escape tax liability.

The government, in its memorandum for Union Budget 2020, has revised the criteria and duration for determining the taxability of persons based on their residential status. Accordingly, a person is classified as resident or non-resident based on the total number of days spent by him/her in India.

Proposed Changes

The government has proposed the following amendments to the Income Tax Act:

  • A person would be considered a resident in India if he/she is in India for a period of 120 days. The duration was previously 180 days.
  • An individual will be considered as ‘Not Ordinarily resident’ if he/she has been a non-resident for seven out of ten “previous years”. The earlier threshold of being in India for 720 days has been removed.
  • A Hindu Undivided Family will be ‘Not Ordinarily resident’ if its manager has been non-resident in India for seven out of ten previous years.

That comes as loopholes in tax laws globally allow people to adjust their residence that results in partial or total avoidance of taxes. High net worth individuals around the world avoid tax liability by hopping between countries that makes them “stateless”—they don’t become residents under tax laws of any country.

The government said that it aims to close such avenues for avoidance of double non-taxation by “stateless persons”. It has proposed to include a clause that would deem any person as an Indian resident if he/she:

  • Isn’t liable to tax in any other country or territory.
  • Such non-taxability is a result of their domicile or residence in such territory.

The amendment in its current form can create interpretation issues, according to Mukesh Butani, managing partner at BMR Legal. “The proposed amendment is a tax evasion measure targeted towards high net individuals whose economic interests lie in India and they escape tax in all jurisdictions,” Butani told BloombergQuint.

“It does have unintended consequences due to the manner in which it’s drafted, and hence, it needs to be calibrated such that it is not used to target genuine tax payers,” he said.

Taxing ‘Stateless’ HNIs

The Budget 2020 memorandum said the proposal aims to address the issue of stateless persons, as it’s possible for individuals to arrange their affairs so that they aren’t liable to tax in any country.

The memorandum said individuals carrying substantial activities and having economic interest in India manage their stay to remain non-residents for a very long time, thus avoiding taxation in India. The amendment is aimed to target such “stateless” HNIs but the provision in the current form can have unintended effects.

HNIs were finding it easy to circumvent the law by meeting the 182-day test despite having economic interest in India. They aren’t just citizens of India but their residences, business etc. are also located in India. The amendment seems to be targeted for such individuals. It’s meant to be more as an anti-avoidance measure but as the government implemented it through an amendment in the residency rules, it can have unintended consequences.
Mukesh Butani, Partner, BMR Legal

The interpretational issues in the proposed provisions can lead to mischief as taxpayers who have moved abroad for employment or other bona-fide purposes could be subjected to tax scrutiny and potential notices. For instance, many Indians retain Indian citizenship but reside in countries like the U.A.E., which doesn’t impose income taxes on its citizens.

“The idea of this amendment seems to bring NRIs within the tax net, who with the view to avoid tax, plan their affairs in a manner so as to avoid tax resident status in the countries that they travel during the previous year” Nand Kishore, partner at DSK Legal, told BloombergQuint.

However, Rakesh Nangia, chairman of Nangia Anderson Associates, said that non-resident Indians who have migrated to Dubai may not come within the ambit of deemed residents. “The government’s move is to tax those HNIs who arrange their affairs to avoid taxes elsewhere in the world.”

The amendment has created confusion among normal Indian citizens working in tax-free countries like the Middle East. While the intent of the government to prevent tax abuse is good, it should bring out necessary clarifications to alleviate concerns of normal salaried Indian expatriates who aren’t liable to tax due to domestic tax laws of those countries and not by way of any tax avoidance arrangement.
Rakesh Nangia, Partner, Nangia Anderson Associates

The absence of taxation in any particular country wouldn’t make a non-resident Indian taxable in India. The government also aims to rationalise the residency norms to avoid any potential abuse or misuse of the provisions.

Dinesh Kanabar, partner at Dhruva Advisors, told BloombergQuint that the government can avoid confusion by clarifying its intent. “The proposed section needs to be amended lead to avoid mischief and unintended consequences.”

The amendment will become effective from April 1, 2020.

Government Clarifies

The anti-abuse provision has been introduced since it is noticed that some Indian citizens shift their stay in low or no tax jurisdiction to avoid payment of tax in India, the government said in a statement on Sunday.

The new provision does not intend to tax those Indian citizens who are bona fide workers in other countries, it said. “Wrong to interpret that bona fide Indian workers in other countries, including in the Middle East, who are not liable to tax in these countries, will be taxed in India on the income they earn there.”

Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession, it said.

(Updates an earlier version to add the clarification issued by the government on the proposal)